State isn't required to balance budget, but it's still the goal

OLYMPIA — It's long been accepted gospel by many here: The state must balance its budget and can't borrow money to cover shortfalls like the one lawmakers now face.

"My brochure for my race said that unlike the federal government we have to balance our budget," said House Majority Leader Lynn Kessler, D-Hoquiam. "I seriously believed that."

In fact, it's a myth.

There's no legal barrier that prevents the state from going into deficit spending, according to legislative staff members and the governor's budget office.

In other words, the state could borrow money long term to help fill a gaping hole in the 2009-11 state budget that the governor says could reach nearly $6 billion. The current two-year budget totals $33.6 billion.

State Treasurer Mike Murphy, who is retiring, says it's a bad idea to borrow money to pay for short-term needs. If you need proof, take a look at New York City, which almost went bankrupt in the mid-1970s from excessive borrowing.

But as Murphy noted, the Washington Constitution "does not prohibit you from doing something that's not too bright."

The state routinely borrows money to pay for capital projects, including new highways, bridges and schools. It issues bonds to finance the projects and pays them off over time.

But lawmakers have not issued long-term bonds using tax revenue that goes into the state general fund to pay for normal expenses such as the salaries of state workers.

Murphy said that's like "borrowing money to buy groceries and pay the light bill. That's not good public policy."

Gov. Christine Gregoire plans to release a proposed two-year state budget later this month that's expected to contain deep cuts in spending to make ends meet.

Victor Moore, director of the governor's budget office, said borrowing money to fund the state's operations is "not good fiscal policy" and "we don't have any plans to do that."

He would not comment when asked if that meant they'd never propose borrowing money.

Borrowing money to fill a gap in the operating budget would require a 60 percent vote in both houses of the Legislature. The Legislature also could send the issue to voters with a simple majority vote.

State lawmakers, grappling with the nation's economic recession, will start putting together a new budget during the legislative session that begins in January.

The closest thing Washington has to a balanced-budget requirement is a section in the state Budget and Accounting Act that says the governor must propose a balanced budget. It doesn't say the Legislature or governor must approve one.

Another provision in state law says the state cannot be in the red at the end of the two-year budget cycle. But the same law allows the Legislature to pay off any shortfall over time, Moore said. There's nothing that requires the state to pay it off immediately.

As for borrowing money, the Washington Constitution does limit how much debt the Legislature can take on. The cap is set at 9 percent of the average amount of tax money the state received during the past three years.

Murphy said the state is pretty close to that limit. But there are ways the Legislature can adjust the calculation used to set the cap, creating more room for borrowing money.

Murphy and other state officials would not estimate how much money the state conceivably could borrow.

The Legislature in 2003 did borrow $450 million using money from a national tobacco settlement to help cover a budget shortfall at that time.

However, Murphy said there were protections built in so that if the tobacco money disappeared for some reason, the state would not legally be on the hook to pay off the debt.

State Sen. Joe Zarelli, R-Ridgefield, the ranking Republican on the Senate Ways and Means Committee, said he's aware there's no law against deficit spending but said there's a restriction of "common sense."

Borrowing money to pay operating expenses, he said, would hurt the state's ability to raise money to build schools and other public structures, for example.

Senate Ways and Means Chairwoman Margarita Prentice, D-Renton, said she didn't know the state has no balanced-budget requirement.

Even so, she said: "If this is how we've always operated, by gosh, this is how we're going to operate. I truly believe that."

Kessler wasn't looking forward to word getting out that the balanced-budget requirement is a myth.

"Oh my God, don't tell my members," she said.

Andrew Garber: 360-236-8266 or agarber@seattletimes.com